Stress tests show big banks would survive crash

Australian banks would not fail if the eurozone were to collapse. Photo: Glenn Hunt

AUSTRALIA'S five biggest banks would be able to survive a savage shock to the economy, including a 35 per cent plunge in house prices and unemployment soaring to 12 per cent, the banking regulator says.

In an attempt to gauge how banks would cope with a deep economic crisis, the Australian Prudential Regulation Authority has conducted a new round of tough ''stress tests'' on the major banks, the results of which were published on Thursday.

If the eurozone were to collapse and send the global economy into chaos, causing Australia's economy to shrink by 5 per cent in a year, the regulator found the nation's banks would face ''significant'' losses.

But the chairman of APRA, John Laker, said none of the banks would fail or breach the capital requirements from the global regime known as the Basel II framework.

''The result is testament, in part, to the stronger funding positions that the advanced banks had adopted since the crisis,'' Mr Laker said in Brisbane.

The five banks involved in the test were Westpac, NAB, Commonwealth Bank, ANZ and Macquarie Group, which make up 80 per cent of Australia's banking system.

Advertisement

The tests also found the banks were also in a position to survive a sudden freeze in global funding markets - which flared up as a key weakness during the 2008-09 global financial crisis.

Mr Laker said a global credit market freeze would be ''systemically challenging'' and would squeeze margins, but maturing wholesale debt would be offset by growth in banks' domestic deposits.

Despite lingering concerns about the risks posted by Australia's housing market - which is responsible for about half the banks' credit exposure to the economy - Mr Laker said losses on home loans contributed to only a fifth of their losses in the test.

A key reason for this was the tougher lending standards in recent years.

Business lending, including commercial property loans and corporate loans, played a bigger role in the modelled losses, as these tend to go into default earlier than residential mortgages.

Under the scenario used in the test, Australia was hit by a plunge in the economies of China, Europe and North America.

It assumed Australian house prices fell 35 per cent from their peaks and unemployment surged to 12 per cent - higher than the crippling levels reached during the early 1990s recession.

It also assumed global debt markets were closed to banks for six months, sparking fierce competition for deposits, which crimped lending margins.

Mr Laker emphasised that the stress test was in no way a forecast, and it was substantially tougher than the previous round of tests in 2010.

''The stress test was intended to test the boundaries of 'severe but plausible', especially given the current relatively strong position of the Australian economy,'' Mr Laker said.